Lost in Translation: Does the Climate Bill Learn from Europe?

For years, we’ve heard that the U.S. has to heed the lessons from Europe’s own experiment in building a cap-and-trade system. Does the just-released Waxman/Markey draft bill on energy and climate show any lessons have been learned?

Europe’s lessons on cap-and-trade are basically three. First, make sure the emissions permits you hand out match the emissions actually produced by the industries you’re regulating. Second, don’t hand them out—sell them. And third, be ready for the carbon market—like any commodities market—to be a rollercoaster ride with lots of price volatility.

First Lesson: Calculate Emissions Better

The draft bill just out of the House will have a better start than Europe’s program, because the Environmental Protection Agency is preparing a registry of industrial emissions. That will enable regulators to calibrate better how many emissions permits are needed.

In Europe, national regulators just asked companies to estimate how many emissions they would have in the future. Then national authorities added some wiggle room on top of those already-inflated figures. The result? There were a lot more emissions permits than emissions, sending the price of carbon permits plummeting more than 90% from their peaks.

Second Lesson: Sell the Permits

Another big problem with the European system: It gave away emissions permits, rather than selling them. That let utilities pocket billions of euros in windfall profits…